State-owned Enterprises (SOEs) are significant players in the global economy. However, their governance poses unique challenges, primarily because the State which is the ‘owner’ of these enterprises, also acts as a ‘regulator’. This many a time manifests itself in the form of the State prescribing less-stringent norms for SOEs as compared to private sector companies, thus, creating an unequal playing field and distorting the principle of ‘competitive neutrality’.

The benefits of ‘competitive neutrality’ or maintaining an ownership-neutral legal and regulatory framework are aplenty. For example, adopting a market-driven legal framework for SOEs which is competitively neutral, will ensure better protection for minority shareholders, and will also make SOEs more productive by raising their governance standards. This in turn will assist in meeting several objectives of the government, including aiding disinvestment by securing higher valuations, increasing inflow of investment into SOEs, and reducing the liability of the government as a majority owner of such SOEs.

In the Indian context, SOEs are synonymous with Central Public Sector Enterprises (CPSEs), where the Central Government directly holds 51% or more shareholding in such companies. While various incentives may be offered to CPSEs such as subsidies and access to cheaper credit, our Report focuses on ‘statutory exemptions’ from corporate governance provisions, granted to government companies to demonstrate a lack of ‘competitive neutrality’ in the regulatory framework governing CPSEs vis-à-vis private sector companies.

Our Report studies various exemptions granted to CPSEs under company law, securities law and competition law, and reveals corporate governance distortions caused by such exemptions. Particularly, we find that certain exemptions granted to CPSEs under the current dispensation are redundant and may unnecessarily expose government finances to lapses. For instance, exempting CPSEs from the provisions of company law which place restrictions and reporting requirements for loans and investments made by companies, or disqualification of directors in case of companies which fail to file financial statements or repay deposit holders, are misplaced and do not resonate with the intent of the Central Government to increase accountability of the boards of CPSEs.

We supplement our analysis with three brief case studies - the acquisition of Hindustan Petroleum Corporation Ltd. by Oil & Natural Gas Corporation Ltd., the merger of State Bank of India with certain other state owned banks, and the Children’s Investment Fund-Coal India dispute, to lend context to our analysis of these exemptions. We also look at SOE governance in terms of competitive neutrality in the legal framework in three leading jurisdictions - Singapore, Brazil and Norway, and suggest Next Steps for India.

We hope that our Report sets the ball rolling and initiates a discussion on the merits of pursuing corporate governance reforms for India’s CPSEs, so that a level playing field is created, and Indian CPSEs are able to harness their true potential.